Interesting semi-academic perspective - potential impact of the tax cuts

[geckosfeet]

From - Simon Johnson in the 12/23/2010 AM edition of Bloomberg.com
Read more: Tax Cutters Set Up Tomorrow's Fiscal Crisis

His basic proposition is that in the not too distant future the US is going to experience a fiscal crisis similar to what is happening to countries in the Eurozone. The reason? Other countries and corporate investors will refuse to continue buying federal debt to finance the running of our country. We will be forced to make cuts, and right now the republicans are holding at least half of the shears.

The central conceit behind official thinking about fiscal policy on both sides of the aisle is that investors will buy almost all U.S. government debt without blinking an eye or increasing Treasury yields. This is an endearing and heart- warming notion, rather like a seasonal showing of Jimmy Stewart in "It's a Wonderful Life."

One has to ask how long do we as a country have before our debt becomes worthless? I mean, at some point the debt we have sold will far exceed future gdp.

The key to debt sustainability isn't how much revenue the government can raise relative to gross domestic product or some other economic characteristic. It's whether a country has the political will to raise taxes or cut spending when under pressure from the financial markets.

This is where Greece and Ireland were found wanting in 2010; we'll see how Portugal, Spain, Italy, Belgium and perhaps even France do in 2011. Then it will be the U.S.'s turn.

Is there a way to head this off at the pass and lessen the long term impact? Because we know that once our social safety nets are dismantled in the name of austerity and restoring financial stability, they will be gone for good. But will that help?

The U.S. government doesn't take in much tax revenue -- at least 10 percentage points of GDP less than comparable developed economies -- and it also doesn't spend much except on the military, Social Security and Medicare. Other parts of government spending can be frozen or even slashed, but it just won't make that much difference.

So when do we truly understand that we must pay our way as citizens - wealthy and not-so-wealthy alike? Probably not until the country is so broke and destitute so as to not be able to afford to maintain the military strangleholds on the worlds choke points that it has now. Then, just maybe, some heroic and mythic political figure will emerge to drive a lead the country down a new path. But that is 200 years down the road.

Read more: Tax Cutters Set Up Tomorrow's Fiscal Crisis

Simon Johnson is co-author of "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," is a professor at MIT's Sloan School of Management and a Bloomberg News columnist.

In general I am not a doom and gloomer, but anyone concerned over their fiscal responsibilities as a citizen must understand that we can't simply sell debt to run the country. To run the country by selling debt is one of the surest ways to economic ruin that I can imagine.

[RC]

1. We need to raise taxes to at least the Clinton Administration level.

Slash military spending. It is mostly the reactions of our own bullying and interference around the world that are used to justify our military spending in the first place.

Create some exceptions for people/families that make less that 200% of the poverty level.

Go to a single payer, Universal Health care. That alone would save the population billions.

Change the rules to favor living wage jobs in this country, instead of what we have now, favoring exporing our living wage jobs over seas.

[geckosfeet]

2. Yes, yes, yes, agreed, and yes.

But I am not holding my breath.